Transfer pricing rules are the applicable regulations for transactions between related parties as defined by the Hungarian Act on Corporate Income Tax (CIT). In general we can say that if a company meets at least one the following criteria, then it will be deemed as related parties for income tax purposes:
- directly or indirectly owns more than 50% of the voting rights in another company
- holds by way of any agreement with another member of the company more than 50% of the voting rights in the company
- is entitled to appoint/dismiss the majority of the executive officers or the supervisory board members of another company
In addition, the Hungarian head office and the foreign PEs/branches, as well as the Hungarian PEs/branches and the foreign head office qualify as related parties; thus, the transfer pricing rules also apply to these enterprises.
Furthermore, the definition of related parties was amended as of January 1st, 2015. As a result of the changes, the concept of common directorship was added to the definition. Thus, even if the ownership (voting) rights of one entity in another entity do not exceed 50%, but the entities in question have the same management, then the two entities are considered related parties and are subject to the obligations prescribed by transfer pricing rules.
The Act on CIT defines the cases when entities are obliged to apply transfer pricing adjustments. According to paragraph 18 of the Act on CIT, transfer pricing adjustment is required if the price used between related parties based on their agreement is lower or higher than the consideration used by independent parties within comparative conditions. The profit before taxation has to be modified by transfer pricing adjustment in the following cases:
- if the profit before taxation is higher due to the agreed consideration between related parties, transfer pricing adjustment has to be made as tax base decreasing items
- if the profit before taxation is lower due to the agreed consideration between related parties, the tax base has to be increased by transfer pricing adjustments
Reduction of the tax base is only allowed if both parties are in possession of a declaration signed by both, declaring the difference between the arm’s length price and the price used, and the other party is subject to Hungarian corporate tax or a similar tax abroad and increase(d) its tax base with the similar amount. The reduction cannot be validated if the related party is considered as a controlled foreign company (CFC).
Transfer pricing adjustments are to be applied irrespective of other tax base increasing and decreasing items.
Download our “2017 Transfer Pricing Overview for Hungary” for more information or simply contact our experts in Hungary if you need any additional support!